Revoking an exemption from Social Security. Will Congress give ministers another opportunity to revoke an exemption from Social Security? It does not seem likely, at least for now. In 2005 Congressman David Camp (R-MI) introduced a bill (H.R. 451) that would have allowed ministers a limited time to revoke an exemption from Social Security. The same opportunity has been granted three times by Congress over the past 30 years. The current attempt gained no cosponsors and is now dead. No similar legislation was introduced in 2006 or 2007.

Rejection of some ministers' applications for exemption from self-employment taxes. The IRS is rejecting some ministers' applications for exemption from self-employment taxes (Form 4361) because the applications were filed before the minister worked at least two years in the ministry. Ministers may exempt themselves from self-employment (Social Security) taxes with regard to services they perform in the exercise of ministry if they file an exemption application (Form 4361) with the IRS by the due date of the federal tax return (Form 1040) for the second year in which they have at least $400 of self-employment earnings, any portion of which comes from ministerial services. The IRS apparently is interpreting this requirement, at least in some cases, to mean that ministers are not eligible to submit Form 4361 until they have worked at least two years. This is an incorrect interpretation of the tax code, which simply defines the deadline for filing Form 4361 and does not forbid ministers from filing the form until they have been engaged in ministry for at least two years. In fact, such an interpretation is absurd, since it means that ministers will have to file the form after the deadline has expired.

Housing allowances and the earned income credit. An unanswered question is whether a housing allowance (or annual rental value of a parsonage) should be treated as earned income when computing the earned income credit. If so, then earned income will be higher, making it more likely that a minister will not qualify for the earned income credit. In the 2001 tax law (EGTRRA), Congress clarified that the term "earned income" includes only "amounts includible in gross income for the taxable year.? However, Congress added that earned income also includes "net earnings from self-employment." The problem is that ministers are always considered self-employed for purposes of Social Security with respect to their ministerial services, and so their entire church compensation constitutes "net earnings from self-employment" unless they filed a timely exemption application (Form 4361) that was approved by the IRS. Logically, then, housing allowances should be treated as earned income for those ministers who have not exempted themselves from self-employment taxes by filing Form 4361. On the other hand, ministers who have exempted themselves from self-employment taxes should not treat their housing allowance as earned income in computing the earned income credit.

As illogical as this result may seem, it is exactly what the IRS instructions to Form 1040 require, and for now the IRS national office is taking the position that there is nothing it can do to change the law as enacted by Congress. So for now, whether a minister's housing allowance (or annual rental value of a parsonage) is included within the definition of earned income for purposes of the earned income credit depends on whether the minister is exempt or not exempt from paying self-employment taxes.

Standard mileage rates for 2007. The standard mileage rate for business miles driven during 2007 was 48.5 cents per mile. The standard mileage rate can be used by taxpayers to compute a deduction for the business use of a vehicle. It also can be used by employers to reimburse workers' business miles under an accountable expense reimbursement arrangement. If your church has adopted an accountable reimbursement arrangement, be sure your reimbursements for 2007 reflect the new rate. If your church reimbursed business miles at a rate that was more than the standard mileage rate, the excess must be reported as taxable income to the employee on his or her Form W-2. In addition, payroll taxes must be withheld in the case of a non-minister employee or a minister who has elected voluntary tax withholding. If your church reimbursed business miles at a rate less than the IRS-approved rate in 2007, the difference represents an un-reimbursed expense that may be claimed as a business expense deduction by the employee if certain conditions are met.

The standard mileage rate for computing deductible medical or moving expenses was 20 cents per mile for 2007.

The charitable mileage rate used to compute the value of a charitable contribution deduction for the use of a personal vehicle for charitable purposes is set by statute, not the IRS, and remained at 14 cents per mile throughout 2007.

For 2008 the standard business mileage rate increases to 50.5 cents per mile, and the standard mileage rate for medical or moving expenses decreases to 19 cents per mile.

This article first appeared in Church Law & Tax Report, November/December 2007. All rights reserved.

2008 Church & Clergy Tax Guide
Stay on top of current tax laws with the annual Church & Clergy Tax Guide. Learn how tax laws apply to you, how to correctly report your federal income taxes and social security taxes, understand relevant exemptions, and reduce your tax liability as much as possible. You'll also find easy-to-understand charts and real-life illustrations.

Copyright © 2008 by Christianity Today International/Church Law & Tax Report. All rights reserved.